Pennyless Pricing

Some legislators are calling for an end to the penny. But would consumers get ripped off?

Transcript

Is dropping the penny wise? I'm Bob Hirshon and this is Science Update. Recent legislation has proposed retiring the penny and rounding all cash purchases up or down to the nearest nickel. But with so many prices ending in 99 cents, would shoppers get shortchanged? To find out, Wake Forest University economist Robert Whaples studied over two hundred thousand transactions at a convenience store chain.

Whaples: I found, in fact, that rounding would slightly benefit consumers. They wouldn't get ripped off at all.

He explains that the proposed law would round only the final bill, not individual prices. And even when many of those prices end in 99, the total purchase including sales tax usually doesn't. What's more, he says the time saved by eliminating pennies could add up to 300 million dollars a year. I'm Bob Hirshon, for AAAS, the science society.

Making Sense of the Research

On July 18, 2006, Rep. Jim Kolbe of Arizona introduced a bill to eliminate the penny from circulation. It’s the second time he’s tried it, having failed in 2001. But things have changed since then. In 2000, the U.S. Mint still made a small profit on each penny it produced. But because the price of zinc used in pennies has skyrocketed, the Mint now spends more than 1.4 cents to make a penny. That may not sound like much, but considering the Mint manufactured 7.7 billion pennies in 2005 alone, those costs can add up to tens of millions of dollars.

However, most pro-penny advocates aren’t worried about the Mint; they’re worried about consumers, whom they feel would be shortchanged by the penny’s elimination. The most famous pro-penny research comes from Penn State University economist Raymond Lombra, who found that eliminating the penny and rounding prices would cost consumers $600 million per year overall. Furthermore, Lombra argued that people with lower incomes would be hit the hardest, since they rely more heavily on cash than wealthier people and rounding would presumably apply only to cash purchases.

While both Whaples and Lombra each studied thousands of small retail transactions, they used different methods to get their results. Most importantly, Whaples assumed that only the final bill would be rounded, rather than individual prices. That’s what the current legislation proposes, and it’s also what the Netherlands did when they eliminated their penny. How does that change the math? Imagine buying six items at 99 cents each. With the penny still in play, that would cost you $5.94. If you rounded the price of each item to the nearest nickel ($1.00), you would spend $6.00 total: a six-cent loss. Lombra found that with most prices ending in 98 or 99 cents, the consumers would usually lose.

However, if you round only the final total, as Whaples did, you would round $5.94 down to $5.90 and save four cents. When you add sales tax into the mix, it randomizes the rounding even more. Whaples also compared transactions at stores in higher-income neighborhoods to those in lower-income neighborhoods and found no evidence that wealthier people would benefit more from the currency change.

Believe it or not, this issue has inspired a good deal of political controversy. With some justification, both sides accuse the other of being influenced by special interests. For example, Americans for Common Cents, a leading pro-penny group, is funded by the zinc industry and contributed to Dr. Lombra’s research. On the flip side, Rep. Kolbe’s home state of Arizona produces more than half of America’s copper and the copper industry would undoubtedly benefit from his legislation, since despite their appearance, nickels contain much more copper than pennies do.

In the end, though, the public’s emotional attitude toward pennies may matter more than any scientific or economic research. Some people see the penny as a vital part of American culture, or have fond childhood memories of saving pennies in a jar. Others find them to be a nuisance and can’t stand fishing through their pockets to find more valuable coins. Since the law will decide the penny’s fate, its life or death rests largely on public opinion, not scientific fact. But if it does go, it wouldn’t be the first; the U.S. Mint stopped producing half-pennies almost a hundred and fifty years ago, when they began to cost more than they were worth.

Now try and answer these questions:

What are the arguments for eliminating the penny?

What are some possible arguments against it?

How have politics shaped the debate over the penny?

Do you think the penny should be eliminated? Why or why not?

You may want to check out the August 11, 2006, Science Update Podcast to hear further information about this Science Update and the other programs for that week. This podcast's topics include: cars that communicate with each other, reasons to get rid of the penny, improving the information in video games, chubby hamsters help with obesity research, and why snow is white when water and ice are clear.

The EconEd Link lesson The Penny Problem, written after Kolbe’s first attempt at anti-penny legislation, encourages students to weigh the evidence and decide for themselves what the fate of the penny should be.

Two leading political groups on opposing sides of this issue are the anti-penny Citizens for Retiring the Penny and the pro-penny Americans for Common Cents. These websites are not partner-reviewed and are political in nature, but students may choose to critically examine the claims and counterclaims made by both sides.